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Stand firm on 10% sales tax, Noda warns Abe

Bloomberg

Prime Minister Shinzo Abe risks triggering market turmoil should he fail to raise the consumption tax to 10 percent next year, his immediate predecessor warned.

The government needs to ride out the economic fallout from the first tax increase in April and then lift it further as stipulated by law, said Yoshihiko Noda, 57, a lawmaker in the opposition Democratic Party of Japan.

“If it doesn’t, it would imply that Japan’s fiscal management strategy will collapse, and the market perception risks are huge,” he said.

During his time as prime minister, Noda passed legislation to raise the sales tax in a bid to help contain the world’s highest national debt burden amid rising welfare costs and a rapidly aging population.

While Abe has said will decide whether to proceed with the increase by the end of 2014 — basing his call on the country’s economic performance in the third quarter — Noda said he was concerned about the government’s resolve.

“What the government is saying is extremely neutral and such a position is a bit of a regression in terms of executing the law,” Noda said.

There’s a risk politicians will place a priority on the coming elections rather than considering future generations, he said.

It would only be economically acceptable to delay a further increase should a financial crisis ensue or the economy worsen next quarter, Noda said. “Giving up for other reasons would raise doubts about Japan’s stance on fiscal consolidation.”

Noda pushed through a Finance Ministry-backed bill in August 2012 to double the tax in two stages, from 5 percent. The legislation sparked a party revolt that led to more than 50 lawmakers to leave his Democratic Party of Japan. The move also contributed to his Lower House election defeat to Abe in December of the same year.

Abe decided last October to proceed with the hike to 8 percent after seeking opinions from 60 economists, business leaders and consumer advocates.